U.S. government bond rates pull back as trade impasse stokes appetite for havens

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Treasurys rallied Wednesday, driving yields lower, after the Trump administration said it plans on slapping a fresh round of tariffs on Chinese goods, compelling officials in Beijing to warn that they would respond.

Later news reports suggested trade negotiations between the U.S. and China had run aground, drawing investors into haven assets such as U.S. government debt.

What are Treasurys doing?

The yield on the benchmark 10-year Treasury note
TMUBMUSD10Y, +0.69%
shed 2.9 basis points to 2.844%, but higher than its intraday nadir of 2.827%. The 30-year Treasury bond yield
TMUBMUSD30Y, +0.63%
gave up 2.5 basis points to 2.945%.

The two-year Treasury note yield
TMUBMUSD02Y, +0.94%
was down 1.4 basis points at 2.578%, after marking its largest one-day yield gain since June 13 on Tuesday. The short-end maturity reached its highest yield since July 2008.

Yields and bond prices move in opposite directions.

What’s driving markets?

The White House late Tuesday said it would assess 10% tariffs on a further $200 billion in Chinese goods. The move is seen as deepening the rift with Beijing and sending a message to other trading partners, in North America and the European Union, that Washington won’t back down in a trade fight. The U.S. last week hit Beijing with levies on $34 billion in goods, and Beijing retaliated with tariffs of the same amount.

The new tariff proposals won’t take effect for another month or two but have refocused fears centered on trade that had begun to recede somewhat on Wall Street and stoked a run-up in assets viewed as risky, like stocks, and away from the perceived safety of government bonds.

Adding to those concerns, a report from Bloomberg News suggested talks between the U.S. and China have stalled, and that there were no plans to renew negotiations. The diplomatic deadlock could suggest the rumblings of a trade conflict won’t abate soon.

Investors also will focus on President Donald Trump’s meeting with European leaders North Atlantic Treaty Organization, an organization that has been the center of the president’s criticism about what he has described as disproportionate costs of military spending NATO for the U.S. Moreover, he described Germany, the largest economy in the European Union, as “captive to Russia because it’s getting so much of its energy from Russia.”

Treasury yields climbed Tuesday after a weak auction of $33 billion in three-year notes. The sale is a part of some $69 billion in paper slated to be sold this week. Treasury yields were expected to climb as the U.S. increased the size of its debt sales to help fund the $1.5 trillion tax cut passed late last year. Larger issuance can drive yields up, in theory.

The market absorbed a $22 billion sale of 10-year notes in the afternoon amid the heightened trade tensions.

What did market participants say?

“Overall, tariffs are going to increase headline inflation in the near-term, but on a longer-term basis, they can slow the economy. There’s some uncertainty on the effect it should have on 10-year Treasurys,” said Geoffrey Caan, managing director of U.S. public bonds at Sun Life Investment Management.

“Bond prices rose as soon as the Administration promised new U.S. tariffs on Chinese imports late yesterday. Prices rose even more as soon as Tokyo markets opened. The spike on active trading mirrored the decline in S&P futures. Headlines explain the latest tariff exchange hurt the risk asset recovery, but positive momentum that lasts less than 3 days isn’t exactly a recovery,” said Jim Vogel, interest-rate strategist for FTN Financial, in a Wednesday note.

“Markets are not over reacting to Chinese tariffs or China’s planned retaliation. They are sighing and returning to middle of the road valuations to wait for a more decisive outcome,” he said.

What else is on investors’ radar?

Producer prices for June rose 0.3%, above the 0.2% expected from economists polled by MarketWatch. Rising wholesale prices could push up inflation, adding to the perception the Federal Reserve will keep raising rates at its current pace. But analysts said unless higher costs started to bleeding into higher consumer prices, investors are unlikely to trade off the surge in producer prices.

New York Fed President John Williams was set to speak at 4:30 p.m. Eastern.

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